During an emergency like a hurricane, many different categories of goods and services experience supply-demand shocks. The shock may be because of a fall in supply (e.g. oil companies can't get gasoline into the area) or a spike in demand (e.g. for generators or plywood) or a combination of both. In a free market, prices will rise to help match supply and demand. Higher prices cause people with less valuable or more frivolous uses of the scarce goods to defer purchase, and can cause suppliers to expend extra effort to get product into the area, even diverting supplies from other areas.

When the government institutes price gouging laws in an emergency, the supply-demand mismatch that leads to the rising prices isn't magically eliminated. First, without higher price incentives, all the incentives to get more supply into the area are lost. Supply and demand under these regulations can only be matched by rationing demand, and typically this is through queuing and increasing search costs (e.g. driving around all over the place looking for a station that is open and has gas). People who gain the limited supplies in this regime are thus those with a lot of time on their hands, where the marginal cost of queuing and driving around does not impose a lot of cost. Think about a roofer scrambling to repair roofs after the a storm -- do they have time to have their trucks and crews sitting dormant in gas lines? Thus, price gouging laws tend to ensure that scarce goods in an emergency flow to those with the least use for them.

59 Comments

Agammamon:

Another advantage of price gouging:

When its known that a potential disaster is about to strike,

Gouging incentivizes those about to be hit to start preparing for recovery - which shifts demand in time backwards (from post-disaster to pre-disaster), spreading it out so that its easier to manage - the more gouging, the more lead-time for preparation people will start looking for and the more spread that demand is, which leads to a lower gouging 'peak' in the post-disaster timeframe.

Gouging also incentivizes those who might look to make a buck out of the situation to start gathering, stockpiling, and planning how to distribute that stock - so they're ready to act even faster in the aftermath.

GoneWithTheWind:

I think that those who rail against price gouging in emergency situations are wrong. The best example is the gas station that raises the price of gas. There is a benefit in that customers will buy less gas, perhaps just enough gas and thus there will still be gas to sell to those at the end of the line. If the station sells at at the going price before the crisis what would stop any customer from simply filling up their tank even though they may only need to drive 50 miles to their shelter destination. Also if the price is kept the same shouldn't/wouldn't the station owner prefer to just shut it down and get out of town himself?
Another point that I run into all the time is that without a crisis the first gas station off the interstate usually charges 10-30 cents more per gallon. How is this not price gouging? And yet I don't hear any of these righteous people complaining about it.

hcunn:

A purely free-market approach to emergency "price-gouging" undermines "social capital" (community cohesion), the volunteer spirit that brings neighbors to help each other dig out and to fend off looters, all without expectation of pay. A reasonable compromise might be to educate the public to expect limited price increases, high enough to encourage providers (including contractors temporarily moving in) and discousage excessive consumption.

kidmugsy:

cc:

People, even monkeys, have a strong reaction to perceived unfairness. "Gouging" triggers this response. It is wrong of course. I just saw on the news where a guy had brought in cases of bottled water to TX area to sell at a higher price. A guy was yelling at him because he was gouging. But if there wasn't a higher profit would he have gone INTO the hurricane zone? No. The argument about volunteerism is all fine and dandy but volunteers are never enough. Think about a restaurant that opens right after a disaster--they have probably had to incur extra expenses and risk in order to be open. Do we expect them to sacrifice themselves? If so, they might just stay closed.

jon spencer:

Where were those who are complaining about price gouging durning the last couple of years of the Obama presidency when .22 LR ammo prices were increasing and supply was diminishing? Well, supply was fairly consistent. But demand was rising.

Mike Powers:

Mike Powers:

With the advent of just-in-time logistics and demand-triggered delivery, there's much less validity to the idea that higher prices cause more supply in the short term. Corporate manages logistics; individual gas stations don't have the option to pay independent fuel truck drivers to deliver fuel to *them* instead of to somewhere else. There is not a mechanism for an increase in the price of fuel to cause an increase in supply, in the short term.

Dan Wendlick:

I've read that the big chain stores, like Lowes, Home Depot, and Walmart preposition trailers of disaster supplies, like bottled water, tarps, generators, and plywood, just outside the predicted damage zones. Over the past 10 years, they've developed the reputation for being able to arrive with supplies faster than FEMA and the Red Cross. Why can they do this? Because the "firstest with the mostest" is going to make the most profit, even at constrained pricing. Perhaps not coincidently, Walmart's Little Rock location puts them halfway between the Midwest "Tornado Alley " and the Gulf Coast Hurricane zone, while Home Depot in Atlanta is at the transportation nexus for the Southeast and South Atlantic zones.

herdgadfly:

Matthew Slyfield:

" If the station sells at at the going price before the crisis what
would stop any customer from simply filling up their tank even though
they may only need to drive 50 miles to their shelter destination."

Worse, if the gas station doesn't raise it's prices, customers have an incentive to bring extra gas cans and take even more than a full tank for their vehicle. Not raising prices incentivizes hoarding, which is even worst from a social / public good standpoint than the price gouging.

Ruggerbunny:

", there's much less validity to the idea that higher prices cause more supply in the short term"

A large number of roofers used to travel to Florida from the Midwest after hurricanes due to the money they could make. The "gouging" meant they could make considerably more money in Florida, even with overhead, than they could at home. Once Florida passed anti-gouging laws these firms no longer had an incentive to travel, thus the supply of roofers was constrained and rebuilding went on longer.

Bill Setser:

Mike Powers:

"you expected me to know you limited you comment to a singular commodity in the discussion?"

Welp
Two sentences of the three-sentence paragraph were about fuel prices, as was the blog post I was commenting on

But I guess if you can't manage to read and comprehend an entire piece of writing before commenting, and must process each sentence as an individual context-free unconnected entity, then there's not much I can do to help you.

Matthew Slyfield:

marque2:

Yes, but if they know prices will go up, they are more likely to prepare in advance for tragedies. When they know the price has to stay the same - they are more likely to purchase after the fact and hoard.

marque2:

marque2:

And if prices went up, oil companies would be able to truck in fuel from further away. No gas coming from California at $2.30 a gallon, but if the price went up to 10 bucks, I am sure Chevron could temporarily set up a convoy.

Max Bnb:

"Price gouging" is one of those emotionally powerful but economically meaningless expressions

Charges of "price gouging" usually arise when prices are significantly higher than what people have been used to.

This raises questions that go to the heart of economics: What are prices for? What role do they play in the economy?
Prices are not just arbitrary numbers plucked out of the air. Nor are the price levels that you happen to be used to any more special or "fair" than other prices that are higher or lower.
What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction.

How do "price gouging" and laws against it fit into this?

When either supply or demand changes, prices change. When the law prevents this, as with Florida's anti-price-gouging laws, that reduces the flow of resources to where they would be most in demand. At the same time, price control reduces the need for the consumer to limit his demands on existing goods and resources.
None of this is peculiar to Florida. For centuries, in countries around the world, laws limiting how high prices are allowed to go has led to consumers demanding more than was being supplied, while suppliers supplied less. Thus rent control has consistently led to housing shortages and price controls on food have led to hunger and even starvation.
Among the complaints in Florida is that hotels have raised their prices. One hotel whose rooms normally cost $40 a night now charged $109 a night and another hotel whose rooms likewise normally cost $40 a night now charged $160 a night.
Those who are long on indignation and short on economics may say that these hotels were now "charging all that the traffic will bear." But they were probably charging all that the traffic would bear when such hotels were charging $40 a night.
The real question is: Why will the traffic bear more now? Obviously because supply and demand have both changed. Since both homes and hotels have been damaged or destroyed by the hurricanes, there are now more people seeking more rooms from fewer hotels.
What if prices were frozen where they were before all this happened?
Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck — and perhaps out of doors or out of the community. At higher prices, a family that might have rented one room for the parents and another for the children will now double up in just one room because of the "exorbitant" prices. That leaves another room for someone else.
Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher prices at the local hotel. That too will leave another room for someone whose home was damaged worse or destroyed.
In short, the new prices make as much economic sense under the new conditions as the old prices made under the old conditions.

It is essentially the same story when stores are selling ice, plywood, gasoline, or other things for prices that reflect today's supply and demand, rather than yesterday's supply and demand. Price controls will not cause new supplies to be rushed in nearly as fast as higher prices will.

Zachriel:

marque2:

They are right that Dasani should be valued more than "smart water."

I don't really see the problem. We have all these people in the world thinking services should be provided for free. It isn't just people charging more - it costs more to bring in services and supplies to your area when you have a disaster, if only because you need different equipment to traverse the spoiled terrain (assuming all the people are forced to work for free).

marque2:

If people paid there would be a lot more rescue boats.
That is actually a good example. If I could charge $100 a head to save people, I might be willing to drive my flat bottom boat all the way from Oklahoma City to Houston, and thereby increase the supply of rescue vehicles.

If I have to do it for free, why bother? I have my own costs - volunteering would take me away from my day job and I would lose a couple thousand dollars in addition to my transportation costs for the boat, and my lodging in Houston, where I too would have trouble finding supplies, etc.

marque2:

But you are wrong about your assertion. There are other ways to supply gasoline to an area that has been disrupted. The problem is it costs more. Yes, in the normal situation, all the gas in your area probably comes from the same pipe (there is usually one outlet per region) - regional gasoline stations add their "private" mix of detergents and whatnot, to the same stock gas as everyone else gets and then sell it at their station. Surplus is offered at a discount to independents.

However in an emergency, there is nothing stopping people from filling from a distant pipeline and trucking it to the emergency area. And then unloading the gas to smaller vehicles that can handle the crumbled infrastructure. However, trucking gas long distances, is much more expensive, and transferring and getting military style vehicles that can get to the final destinations cost a lot to rent - or else they wouldn't have the pipeline mechanism. So yes if gas prices went up to $20 a gallon in Houston - there wouldn't be a gas supply problem at all. Companies and individuals would be more than willing to bring in gas, and the locals would be less likely to "fill up" unless they had a true need to travel somewhere so the supply will get allocated efficiently.

Zachriel:

Mike Powers:

"in an emergency, there is nothing stopping people from filling from a distant pipeline and trucking it to the emergency area. And then unloading the gas to smaller vehicles that can handle the crumbled infrastructure."

ah-heh

you're suggesting that wildcat truckers bringing in trailer loads of jerricans are going to *not* do that because of an anti-gouging law?

like, these people whose whole deal is that they're disobeying the law are going to obey *that* law?

Zachriel:

marque2:

There has been a run on gas in Dallas today. As of Tonight all the stations in at least Arlington where I am, are empty. They didn't raise prices though - because of price gouging laws. If the price were $5 a gallon, I could still get some gasoline if I really needed it. - As it is I will have to avoid going places since I only have 70 mile in my tank.

Agammamon:

"It's a common problem of libertarians to have replaced an understanding of human nature with an abstracted view of the world."

It seems that you've also replaced an understanding of human nature with an abstracted view of the world.

You lament marque2's lack of humanitarian impulses while at the same time complaining about the system that harnesses his base desires to provide the outcome you actually want.

You want a new type of people. Unfortunately, right now you're stuck with the ones that actually exist. Probably should deal with them as they really are instead of how you think they should be. You'll make a lot more progress towards improving the world that way.

marque2:

Zachriel:

Agammamom: You want a new type of people.

Not at all. People are what they are. Markets are the driving force of economic growth and prosperity, but people are more than economic engines. They also are capable of great good and great evil, altruism and xenophobia. Saying that people should charge for using their boats to rescue their neighbors, or that the greater society should look on the desperate as a profit-making opportunity, is to empower the worst aspects of human nature, while ignoring its best.

Matthew Slyfield:

marque2:

My car can't time travel yet. I was able to get gas yesterday at California prices which reminded me of home. Turns out the problem started with an Internet rumor of all things. Still if stations raised their prices appropriately - there wouldn't be a run on gas.

cc:

Many people cannot volunteer for an extended period because they will get fired for being absent or make no money if self-employed. So many people live paycheck to paycheck that it is not reasonable to imagine that everyone can simply volunteer for a week or two (with added expenses as well).
Frankly if I was stuck on my roof I would gladly pay $100 or $500 to get rescued immediately rather than wait for the limited supply of volunteers.